An anticipated purchase of equipment for $400,000, with a useful life of 8 years
ID: 2535387 • Letter: A
Question
An anticipated purchase of equipment for $400,000, with a useful life of 8 years and no residual value, is expected to yield the following annual net incomes and net cash flows:
Year
Net Income
Net Cash Flow
1
$60,000
$110,000
2
50,000
100,000
3
50,000
100,000
4
40,000
90,000
5
40,000
90,000
6
40,000
90,000
7
40,000
90,000
8
40,000
90,000
What is the cash payback period?
5 years
4 years
6 years
3 years
Year
Net Income
Net Cash Flow
1
$60,000
$110,000
2
50,000
100,000
3
50,000
100,000
4
40,000
90,000
5
40,000
90,000
6
40,000
90,000
7
40,000
90,000
8
40,000
90,000
Explanation / Answer
This would go on upto year8.
Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).
=4 years.
Year Cash flows Cumulative Cash flows 0 (400,000) (400,000) 1 110,000 (290000) 2 100,000 (190,000) 3 100,000 (90000) 4 90000 0